Why Do I Owe State Taxes?

Posted by in Taxes | Updated on August 26, 2022

Being a taxpayer is not pleasant, but you cannot avoid paying taxes. However, in some cases, it really makes you wonder “why do I owe state taxes?”. If you’re in the same spot, then you need to understand state taxes, tell them apart from federal ones and come to terms with why you have to pay taxes. So, if you’re here asking “why do I owe state taxes?”, we have some answers for you.

Federal vs State Income Taxes

What makes federal taxes different from state income taxes? There are several differences.

First of all, federal tax is imposed by the federal government, and it applies to everyone. So, it doesn’t matter what state you live in – you still have to deal with federal taxes. The income brackets are subject to change over time. For instance, a few years ago, the lowest bracket was set at 10%, while the highest one was set around 39%.

Unlike federal taxes, the state ones are determined by your state’s government. Some states have better taxes compared to others, which is why many people prefer certain states that are, as they call them, “tax-friendly”.

States can also charge sales and use tax, while there isn’t any federal sales tax. There is a department of revenue in each state, and different tax refund statuses apply in each one.  

Why We Pay State Taxes

One common question is “why do we pay taxes?” State taxes are imposed for multiple reasons. People who have earnings and enough connection to the state will have to pay additional income taxes. This money is usually used in order to pay for social services like public housing, welfare, and Medicaid. Other than that, the money usually goes to hospitals, roads, as well as education, state police, and other such things.

Each State Has Its Own Way of Calculating Tax

Taxes are not the same in each state – they are calculated differently. There are also states that apply no income tax, but they still have ways to collect money. There are 43 states that collect state income taxes. California, for instance, has the highest state income tax rate in the United States. Its tax sits at 13.3%.

The Different Types of Taxes You Could Be Paying

Some states have a flat tax rate on incomes, also known as the fair tax. In Pennsylvania, the flat tax rate in 2020 was 3.07%, meaning that someone who earns $100,000 would only pay $3,070 in state income tax. There are only 8 states that have a flat tax rate in income, respectively Michigan, Utah, Indiana, Colorado, Illinois, Pennsylvania, North Carolina, and Massachusetts.

Other states have no income tax, but that doesn’t mean there are no taxes paid to the state. For example, these states may still have to deal with other taxes, including gasoline tax, property taxes, cigarette tax, and sales tax. The seven states with no income tax are Florida, South Dakota, Texas, Wyoming, Washington, Nevada, and Alaska.

There are also some graduated tax rates that the remaining 36 states and the District of Columbia use. This framework is similar to the one used by the federal government. Under this type of tax, a person would have their income taxed in different brackets at different rates, which increase when the annual income also grows. However, there are fewer brackets compared to the federal tax code, and also lower tax rates.

State income tax can also be individual or corporate.

Why Do I Owe State Taxes

You might owe state taxes because you have a different personal tax situation. Usually, if you got a refund the previous year, you should be able to have another one this year as long as you have the same situation.

But tax years 2018 and 2019 were different. Basically, the IRS came with some new withholding tables in February 2018, which is all a part of the Tax Cuts and Jobs Act. As such, these new tables meant that many people were withholding less, which then created a little change in the paychecks. On top of that, a smaller refund may have been received as well, which happened for the same reason.

This is why so many things changed in 2020 and why some people stopped getting refunds and started owing state taxes instead. It’s confusing to them because they didn’t see any change in their tax situation. But it’s the withholding changes that brought these modifications.

In 2018, the withholding tables were only there for 10 months, whereas in 2019, they were there for the whole year. Therefore, if you owe taxes, the withholding situation that came into place may tell you why. If you want to go back to your withholding benefits, a new Form W-4 should be filed.

Of course, each situation is unique, so there may be other reasons why you owe taxes if you didn’t owe them last year.

Why Do I Owe If I Didn’t Owe Last Year?

If you owe taxes that you didn’t owe last year, it may be due to some changes in your life, such as:

Older Children – A change that was made in the tax reform was the Child Tax Credit increase. It is $2,000 for children who qualify. Nevertheless, only children who were less than 17 years old at the end of the year will be able to claim the credit. Otherwise, you can only claim a $500 credit for the other dependents.

Job Changes – Has there been any job change for you or your spouse? If so, a new Form W-4 should have been completed. If you made some changes in how you filed it, it may be why it affected your situation.

Side Job – If you are a contract worker or freelancer, then you will have to pay quarterly taxes too. You will be responsible for keeping up with payments since you have no paycheck withholding. You may owe taxes to the IRS if you are a freelancer and you haven’t been paying the estimated quarterly taxes.

Credit and Deduction Eligibility – Income changes or students who were previously able to claim the American Opportunity Credit, yet became ineligible due to an enrollment status change may also affect the tax situation.

Filling Changes – If you went through a divorce, marriage or you got a dependent, the filing status for which you are eligible and the way you’re taxed can change. This might affect your tax bracket – that’s why you might owe taxes now.

The Forms You Need to File State Taxes

The forms taxpayers should submit to file taxes include Form 1040 or Form 1040EZ. Other forms are form W-2, W-2G, 1099-MISC, and some additional ones like Schedule 1, Schedule 2, Schedule 3 and Schedule A.

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Conclusion

If you were wondering why you owe state taxes and why you need to file them, now you should know the answer. If you had a change in your life such as a marriage, divorce, or a new job, your tax situation may be different from last year and you may have to pay some state taxes. Make sure you are always aware of your state’s tax laws, so you’re not taken by surprise.


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